Making Cents: Tax bill good for average citizen

Tuesday

Dec 14, 2010 at 12:01 AMDec 14, 2010 at 2:17 PM

There was lots of politicking and publicity about the new proposed tax bill this past week. Much of the hullabaloo was about the extension of tax cuts for the wealthy and the extension of the unemployment benefits for those still looking for work. Little was discussed about what this tax bill means for the middle class and low-income workers. The truth is this proposal is good for the average citizen.

John P. Napolitano

There was lots of politicking and publicity about the new proposed tax bill this past week. Much of the hullabaloo was about the extension of tax cuts for the wealthy and the extension of the unemployment benefits for those still looking for work. Little was discussed about what this tax bill means for the middle class and low-income workers.

The truth is this proposal is good for the average citizen. The key to making this work for you is to recognize there are savings. Calculate these benefits, use that money wisely and be prepared for it to disappear with the stroke of a pen in Washington.

Let's start with what is called the “payroll tax holiday.'' This provision cuts the payroll taxes paid by employees by 2 percent. So the family earning $60,000 will actually put $1,200 more in their pockets. This 2 percent reduction is coming from what we commonly call your Social Security taxes. Social Security is a tough place to take money from; we all know that the Social Security administration also needs money or radical changes to the benefit structure - but I'll try to keep politics out of this.

For those with children in college, you will be eligible for a $2,500 tax credit. This is about $700 more than what you would receive if the bill does not get approved. There are also other tax credits that would disappear or be reduced if the bill doesn't change. Between the earned income tax credit and the child tax credit, add a couple of thousand more to the government subsidy received by low-income taxpayers.

And the last part is the preservation of the lowest tax bracket at 10 percent. This would otherwise rise to 15 percent. Let me explain the difference, however, between tax bracket and your effective tax rate. Your effective tax rate is how much tax you've paid in relation to your total income. Because of deductions, exemptions and other things that reduce your gross income to the taxable income level, your effective tax rate is always less than your income tax bracket.

Congress is expected to vote on the proposal next week. All indications look like passage is likely, although there are still disappointed congressmen on both sides of the aisle. Assuming these changes go into effect, the government hopes you spend this money and put it back into the economy. But if you have some savings or a modest cost of living, you should try to use this newfound money to reduce your debt or create an emergency fund for when these benefits disappear.

John P. Napolitano is the CEO of U.S. Wealth Management in Braintree, Mass. He may be reached at jnap@uswealthcompanies.com.